Kevin D. Hoover wrote: "the issue concerns only fiat money issued by the
government. Nor do I deny that the Federal Reserve records banknotes as
its liability. The question is whether this has any real significance.
It doesn't."
In terms of its redeemability into some other commodity by the Fed,
Federal Reserve notes being its liabilities has little significance.
But the Fed stands ready to redeem its notes -- from one form to another
-- upon request by their holders because they are its liabilities. The
notes do not even have to be defective or worn. (I'm glad William
Coleman recognizes some "contingent liability" on the part of a seller
of defective buckets.)
Thus, the Fed would have to exchange large bills into smaller
denominations, upon request; no questions asked. Of course, most
financial institutions do this, but only as a courtesy to their
customers. Some vendors also refuse to take large bills in exchange for
their wares, in spite of the inscription, "This note is legal tender for
all debts, public and private." (Of course, one might say that no debts
have been incurred until the wares have been parted with or services
rendered.)
As already has been mentioned, the Fed treats coins in its possession as
its assets, precisely because these are issued by the Treasury. The Fed
would have to credit the Treasury's accounts with (i.e., issue its own
liabilities in exchange for) the dollar amount of coins it acquires.
Also note that when paper monies were redeemable into gold or silver,
very few holders did, under normal business conditions. The fact is
that people hold money (currency) only as a temporary "abode of
purchasing power." They are waiting to exchange it for some other
things presently.
I see another significance for recognizing dollar bills (fiat currency)
as the liabilities of the Fed (or a central bank). The Fed is the only
(legal) source from which we obtain that particular commodity by which
all others are valued -- the unit of account; this is the classical
definition or characteristic of what is money (e.g., Adam Smith). (The
switch to calling whatever commonly may serve as a medium of exchange
money occurred some time during the late nineteenth century.)
Thus, when the weighted average of the value of all other goods and
services (the price level) rises or falls, we are clearly able to point
to the source of that occurrence. It must have arisen from too much of
the that particular commodity (currency) having been supplied relative
to its demand, in the one case, or too little of the commodity having
been supplied relative to its demand, in the other. This is, of course,
the classical quantity theory of money.
Matt Forstater wrote: "James -- I'm not sure why you got the impression
that I was saying 'fiat money' is bad or undesirable; not at all." I
got the impression from your having having written, "One side point:
what they are engaged in is barter--the metal disks are not 'fiat
currency.' There are no liabilities!" I thought the exclamation mark
indicated your relief at the presumed absence of liabilities. (The
monkeys could always throw the metal disks back at their issuer if they
didn't like the "game".) Apologies for my misinterpretation.
James Ahiakpor
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